This is inspired by a comment here
I hear the words "middle class" all over the press for some time, in particular, endless campaign rhetoric talking about the 'middle class' as the 'backbone of society' and various other high thoughts. You also have many republicans claiming to be middle class (with a stretched definition of the meaning) as a way of claiming to be in touch with 'ordinary voters', whoever they are.
However, what it means to be middle class has important social and policy implications. There are questions like 'middle class tax cuts'. Who should receive a tax cut for the 'middle class'? At what point is someone no longer in the 'middle class'?
Wikipedia has a pretty good article, but what it doesn't address is what the standard of living is for a 'middle class lifestyle' and how that applies to public policy.
Come below the fold to tell me why you do or don't like my way of looking at the middle class.
I define the middle class in two ways. One is based on public policy, but is also highly subjective. The other is an attempt to describe purchasing power for the middle class and then see what income levels this associates to.
First, the middle class is defined as that economic point at which one earns enough income to be able to do two things.
- Maintain an 'acceptable standard of living' without needing to resort to any kind of government handout to supplement income in the short term.
- Be able to save enough money (on the order of 25% of income) that one does not expect to need to resort to government handouts in the future.
The trick with this definition is that 'acceptable standard of living' needs to be well defined, as there is more than just minimum survival at stake. Secondly this talks about benefit 'need' rather than 'eligibility'.
The second way we can define the middle class is by establishing purchasing power boundaries (upper and lower) and then for a given region we can back-compute out the income levels associated with this. Let's be clear about a critical assumption here, however. The rule is that we have to assume solutions that work for everyone, not individual people. That means ignoring sale prices and exceptional deals, since not everyone can take advantage of them, we ignore them and do our calculations based on 'full price'.
First, the lower bound:
The cost of housing can only be compromised so far before it becomes impossible to find safe, sanitary housing without problems like overcrowding. The same is true of a car; one can only reduce the Total Cost of Ownership (TCO) by so much before it becomes unsafe to drive. Again with food; one can only go so much cheaper before nutrition and long-term health is sacrificed.
- The lowest possible bound for the middle class, then, is where one can save 20% of income, plus meet all of today's needs. (This assumes a long 40 or more year work career with only a little income left over for retirement savings). This would be about where the first definition lies.
- The next point of the middle class discussion comes in when we start talking about 'societal norms'. While it is not strictly necessary to have a cell phone or a landline, it is now not only socially expected, but are used as official means of communication by the government. Society also expects a certain amount of disposable income for charitable giving and for occasional recreational spending. This isn't necessarily much, but it represents the critical 'discretionary income' point, while still saving around 25% of income. I usually think of this as the 'lower middle class' as opposed to a lower level of income.
- The 'middle' part of the middle class starts with what I think of as the 'brand name' part of the middle class. At this point there is enough economic freedom to purchase more expensive 'brand name' goods on a regular bases, and has the option of choosing some more expensive or mid-range options for goods rather than being forced to bargain-hunt.
- The 'upper' part of the middle class lifestyle, in my mind, starts with what I call the 'all new' criterion. New durable goods cost substantially more than used ones. When someone can afford to buy new cars on a regular basis (3-5 years), a new-build house or townhouse, etc, and keep replacing them often enough that they stay in 'new' condition, one is at the upper end of the middle class. Please note that a moderate newly-built house filled with new things, and a new corolla fit this definition; there is no conspicuous consumption or ostentation here.
- I think of someone as completely out of the middle class when their income is sufficient to pass the 'no effort' criteria. That is, when someone has enough income to hire someone to maintain their vehicles, to clean their house, to maintain their garden, to do moderate house repairs, etc, while at the same time saving 25-30% of income and meeting the 'all new' criterion.
It only makes sense to have someone pay net taxes when they cross above the line for #1, since below that point taxing people means that giving that money back in assistance later.
For a single individual, my back of the envelope puts the middle class range for the US at $18,000 to $80,000 per year (for one person, double this for a family of 4), obviously very dependent on where one is living.
I'll post on the tax implications of these definitions and what the systems control theory has to say about economics. Would anyone believe that our current economic policies, especially under Bush, can be shown to be unstable, and not in a good way, for the country as a whole?
***Update 1*** Just as a clarification; I define middle class in terms of absolute income rather than lifestyle. Someone sacrificing savings to make their income 'feel bigger' is not well established in their lifestyle, since it isn't sustainable. I define it more with purchasing power.
***Update 2*** Just because one person, or several, manage, through cleverness or luck to live a lifestyle far disproportionate to their income does not invalidate this model. They are statistical outliers. The key question is 'could a large segment of the population all take advantage of those opportunities at once?'